The corporatist state

Governor's plan overlooks key economic fundamentals

Having seen Silver State unemployment figures staying too high for too long, Gov. Brian Sandoval and his economic development team naturally wish to do something to put displaced Nevada workers back on the job.

So, they've crafted a plan to dangle public funds before private firms as a financial incentive to lure them to Nevada or expand their current operations. The scheme would use $10 million that state lawmakers, with the passage of AB 449 in 2011, took from the state's Unclaimed Property Fund.

Called "Moving Nevada Forward," the plan would anoint seven industrial sectors as prospective recipients of direct subsidies and other tax credits. Each sector would be assigned an "Industry Specialist" — a state-funded super-lobbyist — who will have broad authority to plan the development of his or her sector.

A state-run marketing agency — "Team Nevada" — would promote the seven targeted sectors, and the state's higher-education system would act as a "conduit" for developing new commercial technologies for the seven subsidized sectors. Just which technologies are to be researched by the universities would be determined, ultimately, by a single individual, termed the "Technology Commercialization Director."

In essence, Sandoval's plan would turn the State of Nevada itself into a corporatist enterprise where state commissars plan the development of seven major sectors of the state economy and make investment decisions for marketing, research and development.

The governor may see the plan as ambitious. Actually, however, it is short-sighted and — under any plain-sense reading of the Nevada Constitution — illegal.

Apparently, the governor's economic development advisors have determined that private enterprise in Nevada is producing below capacity, leaving a significant share of the state's labor resources unemployed. Therefore, they propose to boost production by hand-picking the specific industries that should expand production.

They've missed a fundamental point, however: Individuals do not work to serve collective, societal or State of Nevada goals — men and women work to meet specific ends, such as feeding and clothing their families, providing shelter, transportation, entertainment, and, perhaps, the enjoyment of a few luxury goods.

In other words, because individuals produce in order to consume, what should be produced and by what means is most effectively determined, in a market economy, by consumers — not statist planners.

It is heavy consumer demand in one sector, relative to others, that signals entrepreneurs that production should be expanded in that particular sector in order to meet the needs of the consuming public.

The governor's advisors, however, have whiffed this most basic point. Instead, they've arbitrarily chosen to expand production in particular sectors, ignoring the guidance of consumers. As a result, the administration's decisions for directing production are going to produce less value for consumers than production driven through market forces alone. Ludwig von Mises made the reasons for this clear nearly a century ago, when he rigorously explained why bureaucrats could not possibly plan production as efficiently as market forces.

Sandoval's plan would see profit-seeking entrepreneurs vying not only for consumers, but for political patronage also, as they compete not just for market share but also for direct state financial support.

This corporatism model makes it increasingly likely that investment will go to enterprises that consumers don't value highly and which, therefore, like Solyndra, fail. Subsidies granted by the Sandoval administration, then, could actually damage the state economy — even if certain politically connected private businessmen might profit.

Additional dangers await corporatist-minded states that encourage entrepreneurs to vie for political patronage. Cronyism and corruption increase. When Texas Gov. Rick Perry put a state-run venture capital firm in place in 2005, it subsequently became clear that the leading recipients of public funds turned out to be major contributors to Perry's campaign fund.

These politically connected businessmen personally profited from their "juice" within the Perry administration, but many of their subsidized business ventures failed, costing Texas taxpayers millions of dollars.

Preventing scenarios like this is precisely why Nevada's constitution declares that the "State shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company, association, or corporation, except corporations formed for educational or charitable purposes."

Proponents of Nevada state corporatism appeal to the so-called "Special Funds Doctrine" — a legally tenuous rationale that argues that lawmakers can get around constitutional restrictions on the use of public funds as long as those funds originate in an account other than the state general fund.

Not only does this rationale run counter to the spirit of the law, it also overlooks the obvious fact that state funds are fungible across accounts.

For example, that $10 million from the Unclaimed Property Fund — rather than going to subsidize private businessmen — could have gone into the general fund to finance legitimate government expenses.

Instead, taxes supposedly raised to cover state operating costs actually were raised, in part, to allow the governor to "loan or donate" $10 million to private companies.

It's understandable that Sandoval would want to see Nevada's economy recover quickly, but he has taken the wrong approach. His own report acknowledges that private entrepreneurship has been working to restructure the Nevada economy and move the state out of recession. It mentions that Nevada currently leads the nation in export growth, export intensity, export adaptability and new-business launches as entrepreneurs re-form profitable ventures out of liquidation. This is the creative recovery side of the dynamic process that famed economist Joseph Schumpeter called "creative destruction."

Issues

Geoffrey Lawrence is the Director of Research and Legislative Affairs at NPRI. Geoffrey is a frequent commentator on public policy in print, radio and television news in Nevada and his work appears regularly in publications around the state and the nation. He is noted for having developed comprehensive proposals for reform of the state revenue structure, budgeting methods and spending habits.